SEC Issues Guidance on the Potential Application of Rule 12b-1 to Certain Sub-Accounting Fee Arrangements

January 13, 2016

On January 6, 2016, the staff of the SEC’s Division of Investment Management issued guidance (IM Guidance) about when the payment of sub-accounting fees by mutual funds to broker-dealers and other financial intermediaries may raise issues under the Investment Company Act of 1940  if the payments are made outside of Rule 12b-1 distribution plans adopted pursuant to Rule 12b-1 under the 1940 Act.  In the IM Guidance, the SEC staff focuses on whether a portion of such sub-accounting fees paid by the fund is in fact for distribution-related services and, therefore, must be made pursuant to a Rule 12b-1 plan. The SEC staff places the ultimate responsibility for this determination with the mutual fund's board of directors and strongly recommends that the mutual fund's adviser and financial intermediaries that have omnibus accounts with the fund's transfer agent provide the board with sufficient information to make an informed determination about the nature of the services being provided.

The IM Guidance sets forth a number of recommendations, including suggesting both a process by which the board of directors can oversee the payment of sub-accounting fees and related distribution issues and improvements to the type of information the board receives from the mutual fund's adviser and financial intermediaries regarding the nature of the services provided by the intermediaries. The IM Guidance also sets forth the SEC staff's view on whether specific sub-accounting fee arrangements observed by the staff in recent sweep inspections have distribution elements that are subject to Rule 12b-1.

Click to access a Seward & Kissel Legal Alert on the IM Guidance.


Investment Advisers, Investment Companies